More will be on the line than who’s in charge of the largest U.S. electric utility when Duke Energy CEO Jim Rogers testifies Tuesday before the N.C. Utilities Commission.
The panel wants to know why, more than a year after being told that former Progress Energy chief Bill Johnson would lead the merged companies, he was apparently sacked soon after the deal closed.
Duke has said little about the hearing other than that Rogers, 64, a longtime CEO who has survived three mergers, will appear. But the company has every reason to cooperate.
State law gives the seven-member commission (one seat is vacant) authority to “rescind, alter or amend any order or decision” it has made. The commission approved the $32 billion merger on June 29.
It also decides whether to grant rate increases – both of Duke’s operating companies in the Carolinas plan to seek one this year – and at some point will be asked to let the two companies become one.
While it’s unlikely to try to dismantle a merger that took 18 months across a half-dozen jurisdictions to approve, observers say the commission could use its leverage to extract new conditions if it doesn’t like Rogers’ explanation.
“I don’t think the situation has ever come up before – there aren’t that many mergers” of N.C. utilities, said Raleigh attorney Ralph McDonald, who’s practiced before the commission since the late 1960s. “This is new ground.”
While its authority is broad, McDonald said the commission could take more limited steps, such as by adding conditions to its approval. In approving the merger, for example, the commission insisted that Progress “maintain a significant corporate and utility presence” in its hometown of Raleigh.
Robert Gruber, head of the commission’s Public Staff, which represents consumers, said his staff may recommend what the commission does once it hears from Rogers.
“I think they want to know when Rogers and the board knew that Johnson was going to be asked to resign, so they could determine if it was still while the merger was under consideration,” he said. “I think probably the main thing they’re looking for is when they knew and whether they deceived the commission.”
Rogers could testify that he’s the wrong man to ask – it was the board’s decision, not his. He could say that any company reserves the right to change management.
Johnson’s severance agreement says neither he nor Duke can publicly go beyond a Tuesday press release that said the two parted ways under “mutual agreement.” That doesn’t prevent either from “providing truthful disclosures as required by applicable law or legal process,” it adds.
Duke also faces a demand from N.C. Attorney General Roy Cooper to turn over by July 31 board minutes and other documents from the time the merger was announced. Cooper made the demand after Standard & Poor’s placed Duke on a credit watch last week, after Johnson’s resignation. Moody’s, another rating service, affirmed its outlook for Duke.
On Friday Duke’s stock price fell 3.4 percent, its biggest decline since Aug. 10, Bloomberg News reported.
Despite Johnson’s resignation, Duke has repeated that the merger’s financial foundation is solid.
Canceling merger approval “is like unscrambling an egg. They certainly have the power to do that, but where are you then?” said one Charlotte energy lawyer. “It seems like the smart thing to do would be try to hit shareholders” by imposing financial penalties on the company.
The lawyer, who didn’t want to be identified because his firm does work for the utilities, predicts shareholder lawsuits will follow Johnson’s exit. Class-action suits were filed within days of the merger’s announcement in January 2011, claiming Progress shareholders weren’t getting a fair deal.
Speculation abounds about why Johnson resigned, or was pushed out, at 58. He left with up to $44.7 million in severance, pension and other benefits, according to securities filings and Duke’s calculations.
Among the reasons floated is that Progress’ crippled Crystal River nuclear plant in Florida will cost much more to fix than the $1.3 billion Progress has estimated. Its outlook has dimmed since the merger was announced, and it’s still not known how much insurers will cover.
Concrete in the thick containment structure around the reactor began separating after Progress punched a hole in it to replace components in 2009. Progress has so far spent $425 million, not including insurance payments, to repair the plant and replace the lost power.
“I’ve certainly been thinking that maybe Duke had underestimated the impact of Crystal River, and as they became fully aware there may have been some unhappiness about having bought into that,” UNC Charlotte economist Peter Schwarz, who researches the electric industry, said this week. “Whether that would be held against Bill Johnson, I can’t say.”
The Tampa Bay Times, which has written extensively about Crystal River, had no such reservations.
“It comes at a steep price, but finally someone appears to have been held accountable for the mismanagement of Progress Energy and its nuclear power debacles,” said an editorial published Friday.
The newspaper reported that “badly botched” repairs and costs to make up lost power could reach $2.5 billion and be passed to customers. The editorial blamed Florida regulators for letting Progress also bill customers in advance for a new, $24 billion nuclear plant that might not be built.
The N.C. Waste Awareness and Reduction Network, which fought the Duke merger, has cited anonymous sources in saying Duke’s board was to get an independent report on Crystal River before the merger’s close. Duke responded that it was monitoring the plant but still expected to close.